CHART: Here's Why You Should Think Twice Before Becoming A Value Investor

Value investors often cite low price-to-earnings (PE) ratios as
good reasons to buy stocks. If a PE ratio is below its
long-term average and you assume PE ratios are mean reverting,
then the ratio should revert to its mean when earnings fall
further or when the price goes up.

Let's think about this: if earnings are revised down at the same
rate the stock price falls, then the PE ratio should stay
unchanged. However, there is a positive correlation between
earnings and PEs, not price. If you have a basic
understanding of math, then you will realize that this means
prices must move at a faster rate than earnings in order for the
PE to move.

This is troubling for investors because the implication of this
correlation is that earnings revisions amplify price volatility.

RBC Capital Markets

To be fair, value investors tend to be more patient and hold
longer term positions than most other traders. And this
chart does show some mean reversion, which means its possible to
make money by going long low PE stocks and going short high PE
stocks.